Tariffs are taxes a government places on imported goods — in other words, stuff coming from other countries.

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Imagine your country makes t-shirts. One day, cheaper t-shirts from another country flood the market. Great for shoppers, but not so great for local makers who can’t match the price. To help them, your government adds a tariff on imported t-shirts which makes the foreign shirts more expensive. As a result, shoppers may turn back to local options, helping domestic businesses compete and keep jobs.

Tariffs can have a big impact—both positive and negative. Let’s start with the good news:

As shown in the t-shirt example, tariffs can protect local businesses by making imported goods more expensive. This helps domestic companies stay competitive and preserve jobs.
Tariffs also bring in revenue for the government, which can be used to improve public services like roads, infrastructure, education and health care.
In some cases, tariffs can even encourage local production, since companies may try to make more goods at home instead of importing them.

But there are also downsides:

With less foreign competition, local companies may raise prices, knowing consumers don’t have as many choices.
Less competition can also lead to less innovation—businesses may stop improving their products if they don’t have to keep up with global standards.
Tariffs can disrupt global supply chains. Many “local” products still depend on parts from other countries. If those parts are hit with tariffs, production becomes more expensive, which leads to higher prices for consumers and slower manufacturing.

How do tariffs affect the economy? While they can protect local businesses and jobs, raise government revenue and encourage domestic production, there are also disadvantages including higher prices for consumers, less competition/innovation, disrupted global supply chains, and slower production and economic growth.

In a boom, tariffs can cool down an overheated economy while at a peak, they risk trade wars and reduced global demand. In a recession, they may worsen the slowdown by raising costs; during recovery, they can limit growth by keeping prices high.

Tariffs can help in the short term, but often lead to higher prices, slower growth and global trade tensions over time. Like any tool, they need to be used wisely.

Michele Sarna is a certified financial planner^™ with Beacon Pointe Advisors and can be reached at (760) 932.0930 or [email protected].

Provided as information only and should not be considered investment, tax or legal advice or a recommendation to buy or sell any type of investments. Asset Allocation, portfolio diversification and risk strategies cannot assure or guarantee better performance and cannot eliminate the risk of investment losses. Form ADV contains important information about Beacon Pointe Advisors, LLC, and may be viewed at: adviserinfo.sec.gov.